This article is a follow-up to Five Immediate Threats to Retirement Accounts which discussed immediate and active threats to retirement accounts. Retirement accounts should be managed very differently than traditional investment accounts. Retirement accounts usually represent a much longer investment horizon, so evaluating the economy from a higher vantage point is necessary. The first lesson of economics is that there is no such thing as a free lunch. Some hazardous problems are looming that our economy will need to face eventually. When the day of economic reckoning fully arrives, the unprepared will eat one of the most expensive lunches. Here is a brief overview of five of the most significant long-term threats to retirement accounts.
1. National Debt/Government Spending
The U.S. national debt will probably surpass $31 trillion this month. It is currently $30.9 trillion. $30.9 trillion will never be paid back. If we paid $1/second, it would take 988,800 years to pay it off. The debt is so large that the only way to finance it is taking on more debt. See the current debt according to the Treasury.
The government continues to spend more than the country produces. Since September 30, 2019, the debt has increased by $8.2 trillion, about a 36% increase. There was a 420% increase in the number of Dollars in circulation since March 2020. The inflation we have experienced represents only about 3-4% of the total currency expansion. Politicians are bragging about how they are reducing the deficit. The deficit is the difference between annual revenue and expenditures. The debt is the total of all deficits. Reducing the deficit only means the debt is not increasing as quickly but is still increasing. Read more about the National debt.
2. State Pension Funding is in Jeopardy
Many states have growing and unsustainable debt liabilities. State politicians must make hard choices about funding current programs, so long-term pension funds have become an easy source for temporary funding. In essence, the politicians are kicking the can down the road and trading mild short-term problems for massive long-term problems.
The growth of unfunded state liabilities has grown 562% since 2007, totaling around $1.4 trillion. $1.4T would be greater than the GDP of Australia, which is the 13th largest economy. The most considerable portion of unfunded state liabilities are pensions and retirement benefits. States average 77.9% funding for pensions, meaning states don't have funding for about 4,149,200 pensions. The unfunded pensions represent about 6.5% of the 50-64 year-old population, the generation most likely affected by the shortfalls. The government will have millions of vulnerable seniors without income and probably create or enhance social programs to support them. The most logical end is printing (inflation), taxes, and mandatory purchases of government bonds in retirement accounts.
BRICS (Brazil, Russia, India, China, and South Africa) is an economic alliance between developing countries. Their stated purpose is to create a commodity-backed currency to compete against the Dollar as the international reserve currency. Creating a competing currency would splinter the world economies into two opposing systems, with the BRICS economy having most of the oil, rare earth minerals, and gold.
Each of the members of the BRICS produces large amounts of gold, silver, oil, natural gas, rare earth minerals, and other rare commodities. The BRICS are finding several countries looking to get out from under the hegemony of the Dollar and risk of sanctions. Five more nations applied to join the BRICS, Iran, Argentina, Turkey, Egypt, and Saudi Arabia. Both Saudi Arabia and Iran are major oil producers. Iran applied first, and China and Russia spoke highly of their application. Saudi Arabia hates Iran, saw Iran was going to be accepted, and still applied to join. Proxies of Iran are fighting against the proxies of Saudi Arabia in Yemen. Due to the political and military tension between Saudi Arabia and Iran, it is unlikely that both would be accepted. However, it is almost a given that the BRICS will accept at least one of the two countries. If they both are accepted, it would mean their hatred of the U.S. and the Dollar is more significant than their hatred for each other. Saudi Arabia's application means they are more interested in dealing with the BRICS than the U.S. and other G7 countries. The international oil trade is about to change drastically. A large percentage of oil will no longer be traded in U.S. Dollars. Read more about the BRICS.
4. The Collapse of the Petro-Dollar is Coming
When President Nixon removed the Dollar from the gold standard in 1971, he quickly made a deal with Saudi Arabia called the Petro-Dollar. The U.S. would provide military aid and equipment to Saudi Arabia in exchange for the international oil trade to happen in Dollars. The relationship between the U.S. and Saudi Arabia soured after then-candidate Biden said Saudi Arabia should be a pariah concerning the killing of journalist Khashoggi. More than 80% of the global oil trade happens in Dollars. However, Saudi Arabia is actively negotiating with China about using Yuan for their purchases. Also, Saudi Arabia has applied to join the BRICS.
Petro-Dollar recycling is one of the primary reasons the U.S. has political influence worldwide. Petro-Dollar recycling happens after an oil transaction in dollars, and there is an excess of Dollars outside the U.S. The holder of the Dollars will reinvest the Dollars back into their economy by building roads and infrastructure or investing in the American stock market. The Petro-Dollar system allows the U.S. to print uncontrollably and export inflation. If Petro-Dollar recycling ends, all those Dollars come back stateside, and all the inflation comes with it.
The two countries that benefit the most from the Petro-Dollar are the U.S. and Saudi Arabia. Most other countries feel oppressed by the system. Most people are aware that China, Russia, and Iran want to see the Dollar overthrown. However, many people don't realize our allies feel the same way. The EU has been trying to shift the balance of transactions outside the Dollar for several years. France wanted to buy Iranian oil but feared American sanctions, so they did not buy. This type of fear-based compliance creates resentment and nations searching for alternatives. The BRICS are actively working on an alternative currency. Read more about the Petro-Dollar Collapse.
5. Healthcare Costs are Rapidly Increasing
According to CNBC, the average retiree will spend about $315,000 on healthcare. CNBC also reports the average savings of people 65+ is $280K. Let those numbers sink in. Even if you have planned well and have enough for your healthcare costs, millions will not. Hospitals will raise prices for people who can pay, and the government will raise taxes to pay for the people who can’t.
Rising gas prices and supply chain challenges are pushing up medical supply costs. The Russian war against Ukraine has made European energy costs astronomical. The current price of natural gas would be equivalent to $410 barrels of oil. Germany is Europe’s largest economy. Its primary export is pharmaceuticals, and its third largest export is medical equipment. Manufacturing prescriptions are becoming more expensive everywhere, not just in Germany. Many patients could not get procedures done during the pandemic creating long waits for healthcare. The long-term Covid 19 effects are still unknown, but mental health Covid 19 issues are draining resources. Read more about rising healthcare costs and your retirement.
What Does It All Mean?
Most Americans can’t imagine a world without the Dollar. However, the rest of the world can and is taking deliberate actions to bring it about sooner rather than later. Reserve currencies have a lifespan of about 100 years or so. A reserve currency has a boom-and-bust cycle just like everything else. When a currency becomes the primary reserve currency, there is an instant demand everywhere, and the home country lives well. Citizens of the world want to transact internationally, so the producing government is given a license to print. However, like clockwork, politicians will eventually overdo it, and the world no longer wants that currency. The fear of sanctions has soured the world. The American Dollar is quickly becoming less desirable internationally.
The writing is on the wall for the Dollar’s reckoning. The current system will not last forever. Any paper asset priced in Dollars is in the way of the foreseeable economic avalanche. Most people have their wealth in their houses and their retirement accounts. When the world establishes a new pricing standard, you will want to hold assets with intrinsic value. Your house has intrinsic value, but what about your paper-backed retirement account? Are you going to leave your life savings exposed?
What Can You Do? Call the U.S Gold Bureau to learn how to transfer your retirement account into precious metals. Decide to be proactive instead of reactive.